Keynes Seminar 15 October 2008 Mark Hayes Robinson College, Cambridge General Theory Reading Group 1: Necessary Preliminaries © PKSG 2008

Mankiw on The General Theory “Dubious Keynesian Proposition no. 1: Learning how the economy works is best achieved by a careful reading of Keynes’s General Theory. Since Keynesian economics is derived, by definition, from the work of John Maynard Keynes, one might suppose that reading Keynes is an important part of Keynesian theorizing. In fact, quite the opposite is the case.” [European Economic Review, 1992]

Five Propositions Equilibrium Competition Money Expectation Liquidity

1. Equilibrium Employment is in continuous ‘daily’ equilibrium corresponding to the point of effective demand, although equilibrium does not mean that all available labour and capital ‑ goods are employed and factor markets clear, nor that expectations are fulfilled.

2. Competition Competition in supply and demand is the motive force which holds the system in equilibrium. Agents take prices in each market to be independent of their own actions. The degree of competition is not the same as the degree of monopoly.

3. Money Equilibrium reflects decisions to incur money- expense by employers, investors and consumers, and not the optimal allocation of factors of production. Money is an integral part of the theory of value and employment, and not a veil. The factor cost-unit is not an equilibrium value.

4. Expectation Decisions to produce, consume and invest are based on expectation. Effective demand corresponds to the state of expectation at any time. The long and short term are not the same as the long and short equilibrium periods. The future is unknown, and long-term expectations are fundamentally uncertain.

5. Liquidity Liquidity means more than convertibility and includes invariance of value to changes in the state of expectation. Assets possess this property in different degrees, so that money is more liquid than bonds, and both are more liquid than capital-goods.

Five Propositions Continuous equilibrium Perfect competition Flexible prices ‘Rational’ short-term expectations, but long- term expectation quite a different matter Liquidity means more than convertibility

Next time: Michael Ambrosi University of Trier Keynes, Pigou and The General Theory